SYDNEY—Australian lawmakers backed a plan by billionaire James Packer to open Sydney's second casino, as the city vies to lure Chinese high-rollers from gambling venues elsewhere in Asia that have grown increasingly popular.

Mr. Packer's Crown Ltd. Thursday moved to the final stage of an approval process, led by Australia's New South Wales state government, for an invite-only casino within a glitzy 60-story waterfront hotel development. Until 2019, though, Echo Entertainment Ltd. —which owns the Star, Sydney's sole gambling venue—will continue to hold an exclusive casino license in the state.

Crown Ltd.

How the planned hotel and casino development on Sydney's waterfront might look if it alone were lit.

The need to inject competition into Sydney's gambling market was a key driver behind the decision to endorse Crown's proposal, state premier Barry O'Farrell said at a media conference. Approval is now largely a technicality.

Crown had said it needed to have a casino to make the proposed 1.5 billion Australian dollar (US$1.4 billion) six-star hotel commercially viable.

Despite its picturesque harbor and beaches, Australia's largest city has been losing the battle to attract wealthy Asian tourists in recent years as new casinos have sprouted up across the region.

The country accounts for just 3% of global high-roller gambling revenue annually, according to Allen Consulting Group. Macau and Singapore are the most lucrative gambling markets in Asia, but more recently casinos have opened in countries such as Vietnam, Cambodia and the Philippines. In Sydney, the Star has faced a number of design and management mishaps since opening nearly two decades ago.

Mr. Packer, a media-scion-turned-gambling-mogul with a penchant for super yachts, is co-chairman with Macau mogul Lawrence Ho of Melco Crown Entertainment Ltd., one of six casino license holders in Macau.

The territory's $38 billion in annual gambling revenue is six times that of the Las Vegas Strip. Messrs. Ho and Packer also are building a casino resort that is slated to open next year in the Philippines.

Thursday's decision is a setback for Echo Entertainment, which had promised lawmakers it would spend about $1 billion upgrading the Star if they rejected Mr. Packer's bid for a rival license.